Cost Segregation in Arkansas

1. What a cost segregation study does

A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.

On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where Arkansas comes in.

2. Arkansas and federal bonus depreciation

Arkansas has never allowed IRC 168(k) bonus depreciation for either individual or corporate income tax. Ark. Code Ann. 26-51-428 adopts IRC Sections 167 and 168(a)-(j) as in effect on January 1, 2019, and expressly does not adopt 168(k); the DFA Corporate FAQ states flatly that no bonus depreciation is allowed for Arkansas income tax purposes. The OBBBA's permanent 100% bonus (July 2025) has no effect on Arkansas because the state's static conformity date predates it, and HB1501 (2025 regular session), which would have adopted 168(k) as in effect January 1, 2024 effective for tax years beginning on or after January 1, 2025, died in the House Revenue and Taxation Committee at sine die adjournment on May 5, 2025. The 2025-revision AR1100ADJ adjustment schedule still carries 'Federal bonus depreciation' as an add adjustment for TY2025, confirming decoupling continues post-OBBBA.

Federal bonus depreciation is added back (AR1100ADJ Part A line 3 for corporate/pass-through filers; individuals compute Arkansas depreciation separately since AR1000 does not start from federal AGI) and the taxpayer deducts Arkansas-computed regular MACRS depreciation instead (Part B line 3). There is no fixed-period recovery schedule like Minnesota's 5-year addback; the disallowed bonus is recovered naturally through regular MACRS deductions over each asset's recovery period, so Arkansas basis and depreciation schedules diverge from federal for the asset's whole life.

3. Section 179 in Arkansas

Arkansas Section 179 cap: Pre-OBBBA federal indexed limits: $1,220,000 with $3,050,000 phase-out for 2024; approximately $1,250,000 with $3,130,000 phase-out for 2025. Arkansas does NOT pick up the OBBBA $2.5M/$4M increase because its conformity date is January 1, 2022..

For tax years beginning on or after January 1, 2022, Arkansas adopts IRC Section 179 as in effect on January 1, 2022, which tracks the federal $1M base with inflation indexing but freezes out any later statutory changes, including the OBBBA increase to $2.5M. Before 2022, Arkansas conformed to Section 179 as in effect January 1, 2009, capping the deduction at $25,000 with a $200,000 phase-out, a historical trap that still matters for assets placed in service in pre-2022 years. HB1501 (2025), which would also have raised the state 179 amount to the current federal level, died in committee.

4. Does it still help in Arkansas?

Yes. Because Arkansas adopts IRC 168(a)-(j) (regular MACRS), reclassifying components from 27.5/39-year real property into 5-, 7-, and 15-year classes still accelerates Arkansas deductions through shorter recovery periods and 200%/150% declining balance, and up to roughly $1.25M of eligible personal property can still be expensed under the state's Section 179 conformity; only the federal 100% bonus layer is lost on the state return.

• •Arkansas returns are standalone computations (the AR1000 individual return does not start from federal AGI), so bonus is not so much 'added back' as never allowed: taxpayers keep a separate Arkansas depreciation schedule for the life of every asset, and state basis differs from federal on sale, affecting Arkansas gain and depreciation recapture.
• •Arkansas's 168 conformity date of January 1, 2019 predates the CARES Act's retroactive QIP fix, so qualified improvement property is arguably still 39-year nonresidential real property for Arkansas purposes rather than 15-year, a trap for interior-improvement-heavy cost seg studies.
• •HB1501 (2025) would have adopted 168(k) and current federal 179 limits with an estimated $104M FY2026 revenue cost; it died in the House Revenue and Taxation Committee at sine die on May 5, 2025, so decoupling persists despite OBBBA.
• •Arkansas Section 179 jumped from a $25,000 cap (IRC 179 as in effect 1/1/2009) to full federal-indexed limits starting with tax years beginning in 2022; property placed in service before 2022 is still stuck on the old $25,000 schedule for state purposes.
• •Arkansas's individual income tax top rate is low (3.9% after the 2024 cuts), so the state-level cash cost of losing bonus is modest relative to high-tax decoupled states, but the recordkeeping burden of dual depreciation schedules is permanent.
• •The multistate adjustment schedule AR1100ADJ (rev. 6/26/2025) is the mechanical home of the adjustment: 'Federal bonus depreciation' add on Part A line 3, 'Arkansas depreciation adjustment' deduction on Part B line 3, attached to AR1100CT, AR1100S, AR1050, and AR1100PET.

5. The exit: recapture and timing

The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.

Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.